THE EFFECTIVENESS AND RELIABILITY OF INTERNAL CONTROL SYSTEM IN THE BANKING INDUSTRY (A CASE STUDY OF GUARANTY TRUST BANK)

CHAPTER ONE

1.0      INTRODUCTION

1.1       BACKGROUND OF THE STUDY

It is interesting to note those audits originated from the word audit are: which means of hear in the olden days, a person who was appointed to checks.

The accounts of the parties responsible for non financial transaction is used to be called and hear the explanations needed by the person who held the account come to be known as an auditor.

Originally, the objectives of an auditor was limited which include trust to ascertain the fact, whether the accounting party has properly receive the receipt and payment of cash on behalf of his principal which more cash audit but the scope of audits today as been widered, it ascertain whether the balance sheet and the profit and loss accounts exhibits a true and fair view of the financial statement of the concerned. This has therefore become the most important part of the auditors duties to the enlargement of size and complexity of business enterprises.

Today, the concept and scope of auditing has changed a comprehension definition of auditing given by Roberts E Schlessors and quoted by Jagdish Drakash in his book: Auding; principle practice and problem (1990) says, Auding is an examination of financial statements, records and related operation to determine adherence to generally accepted accounting principle, management policies or stated requirement.

In this definition, emphasis was laid on auditing being related to operations and how far they adhere to management policies or stated requirement in other words we find that was the need to introduce effective and reliable.

What then is this internal control? Internal is : the whole system of control financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner ensuring adherence to management policies safer fguarding the assets and securing as far as possible the completeness and accuracy of records. The individual components as known as control or internal control.

Millicham A.H (1990) in his institution manual for accounting students. Also it was stated in paragraph 5 of the auditor operational standard requires, that for an audit to place reliable on any internal control, he should ascertain and evaluates those controls and perform compliance test on their control. We therefore see that to have a sound reliable and effective control system would be worth while for the organization and the possibility failure would be mine.

1.2      THE STATEMENT OF THE STUDY

With reference to what was mentioned in the introduction that business failure could result from ineffective and unreliable controls, this research work therefore will look into ineffective and reliable controls system in the banking industry today. This posses as a problem because it bring so many associated problems which could be detrimental of working capital high debt equally ratio decline, profit decline, high labour turn over, low capital utilization, low quality services and finally fraud of which could be either sales fraud, purchases Wages of pretty cash fraud. 

1.3      PURPOSE OF THE STUDY

The purpose of the study is to contribute look at the problem at hand (Business Failure) the associated problem it bring an interrelationship between these variable and how one lead to the other or it’s effect etc and to provide deterioration of working capital. The amount available for running of the days to day business if there is uncontrolled wastage writing of to many debts e.g high debt equity. The ratio of outside investor to the share holders is important that a business is geared, bur when the gearing ratio becomes too high, there could be problems of insufficient profit to pay dividend after the deduction of increasing debenture. Interest interference of deduction holder in the affairs of a company in respect of non payment. Irregularities invading the use of deposit to obtain an illegal or unjust advantages, this could either be cash or sales fraud, these types of fraud relate closely because before a cash fraud may occur a sales must have occurred purchase fraud could be misuse of order form, creation of non-existing supplies, presentation of two cheques for signature with the same supporting documents.

WAGE FRAUDS:- This could occur by including names on payrolls, leading ex-employees on the payroll or overcastting gross and net columns in the wages sheet.

Wage fraud can be effective and reliable internal control help to reduce business failure and other related problems.

1.4      SCOPE AND LIMITATION OF THE STUDY

Internal control system being a very large topic it could therefore be said that it would be difficult to look at all department of internal control in an organization as a result the researcher limits herself to accuracy and authorization of operation with respect to cheques, cash receipts wages, salaries, petty cash and measuring the reliability and effectiveness in the banking industry.

Personal interviews and structured questionnaire will be employed appropriately, also textbook journals, annual reports shall be consulted.

The limitation encountered were those and willingness of respondents to answer important question.

1.5      THE SIGNIFICATION OF THE STUDY

Of the financial service sectors such as Banking, Building Society. Consumer credit, purchase leasing, factoring business ventures etc. Bank represent probably the most important sector this is not just in term of turn over profit and employment of labour but also in it’s paramount impact on the other sphere of the economy.

Any problem on the Banking System would in =variably have strong effect on the economy and that is why this research work tries in study the internal control on the Banking sector with respect to guarantee trust bank and see how it’s effectiveness and reliably would be used to prevent business failures. This work will serve as a basis of broadening the research knowledge on internal control and it’s customers and investors, their would be confidence control in place that can be relied upon for safe guarding their deposits.

Management on the other hand will be able to reduce losses and improve on internal control system.

Finally, the academic world will use this work as a basis for further study.

1.6      ORGANIZATION AND PLAN OF THE STUDY

Plan of the study to this project is divided into five (5) chapters.

CHAPTER ONE: - Of this project focus on or comprises the introduction background of the study, statement of the problem, purpose of the study tentative research question definition of terms, scope and limitation of the study also significant of study.

CHAPTER TWO: - laid emphasis on the literature review that is what other author newspapers, magazine involved and also to verify the interest figure.

          Audit Evidence:- This is obtained by carrying out audit test

         Compliance Test:- These are those tests which seek to provide Audit evidence that internal control procedures are being applied as prescribed.

            EFFECTIVENESS:- This is the degree to which predetermined objectives of target is met.

          ENQUIRY:- Seeking relevant information from knowledgeable persons inside the enterprises whether formally or informally.

         COMPUTATION:- Checking the arithmetical accuracy of the accounting records or seeking independent calculations.

           INTERNAL AUDIT:- This is an independent appraised function within an organization for the review of system and the quality of performance as a services to the organization. It objective examines adequacy and internal control as a contribution to the proper economic; efficient and effective use of resources.

          INTERNAL CHECK:- This is an aspect of internal control which is exclusively concerned with the prevention and early detection of errors, and fraud, this involve the arrangement of book keeping and other clerical duties in such a way as to ensure:-

i.            That no single fraud is encountered from its beginning to its conclusion by only one person.

ii.          That the work of each clerk engaged upon a task is subject to an independent check in the source of another duty.

      INTERNAL EVALUATION QUESTIONIAIRIES: - This is list of question designed to get specific information about a particular item. Financial or otherwise, with regard to internal control of an organization have said about objective, course and prevention of banking industry and the principle of effectiveness and reliable of the internal control in Banking industry.

CHAPTER THREE: - Detail with research methodology historical background of the internal control research design study population, sampling design, procedure, pilot study validity and reliability, administration of data collection schedule, procedures for processing and analyzing collection data and limitation of methodology.

CHAPTER FOUR:- Deals with presentation and analysis respondent characteristics and classification occupational, sample sex, age, departmental, level of education data, comparison of statement reflecting whether internal control to prevent business features.

CHAPTER FIVE:- Which is the last chapter formed the summary of the whole study, conclusion, recommendation and bibliography of the study.

1.7      DEFINATION OF TERMS

         AUDIT:- In modern sense, an adult is a process (carried out by suitable qualified auditor) whereby the account of business enterprises, including limited companies, charities, trust and professional firms are subjected to scrutiny to form an opinion as to their accuracy, truth and fairness. This opinion is imbedded in an “audit repot” addressed to those interested parties who commissioned the audit, or to whom the auditors are responsible undertake.

        AUDIT TEST: - Test carried in the process of auditing to determine the trueness and failure of the transaction.

INTERNAL EVALUATION QUESTIONNAIRE:- This is list of questions designed for assessing whether specific error are possible than with establishment whether certain desirable

 ORGANIZATION CHART:- This is pictorial presentation of level of authority and such that no person is responsible for the recording and processing of a complete transaction.

SUBSTANTIVE TESTS:- These are those tests of review which seek to provide evidence as to the competence accuracy and validity of information in the accounting records in the financial statements.